What is Contract Fraud?

Fraud is defined as any intentional misrepresentation of a material fact knowingly made by one person to another with the intent that the other person acts in reliance of that statement. Contract fraud is a particular type of fraud where the misrepresentation of a material fact is made in relation to the formation of the contract. There are many different civil remedies for contract fraud including voiding the contract and the defrauded party collecting monetary damages. Depending on the jurisdiction and the type of contract fraud, there may be criminal penalties as well.

Contract fraud occurs when someone intentionally makes a material misrepresentation of fact in the process of forming a contractual agreement. In this context, material misrepresentation means a false statement that has substantial effects on the formation of the contract. For example, in a contract to purchase a car, if the seller tells the buyer that the car has never been in a major accident, when in fact it had, then that would constitute a material misrepresentation. Conversely, if the seller tells the buyer that he changed the oil every 3,000 miles, when in fact he or she only changed it every 3,500 miles, the discrepancy is not likely to fall into the category of material misrepresentation and thus could not amount to contract fraud.

There are two main remedies for contract fraud that the defrauded party may choose between. The first is monetary damages to be paid by the fraudulent party to the defrauded party. Taking the previous car sale example, the buyer who was under the impression the car had not been in any previous accidents could sue for the difference between the car’s value with the fact it had been involved in an accident coming to light and the amount that he or she paid the seller while under the impression that the car had never been in an accident. The other remedy for contract fraud is simply voiding the contract and returning any amounts paid by the buyer and returning the car to the seller, which is called rescission.

Depending on the jurisdiction as well as the nature of the contract fraud, there could be criminal penalties for the fraudulent party. Unless the fraud is particularly significant or egregious, there will typically be no criminal penalties and the fraudulent party will have to simply pay civil damages. However, some jurisdictions will institute criminal fines or jail time for those who commit contract fraud. This is more common where the defrauded party is a governmental organization.